Ten Steps to Financial Freedom

The key to a happy retirement is having enough money to make the golden years count. The alternatives are grim either way: working long past the age at which you'd have liked to retire, or subsisting entirely on a diet of Value Baked Beans for the last thirty years of your existence.

The current pensions crisis has come about because people are living longer than in the past but not saving more to compensate. With many of the best company pension schemes shut to new members, or even closing down entirely, and the State Pension predicted to fall in value over the long term, the responsibility has now shifted to us to provide for our own retirement.

What's a Fool to do? Start saving early, and defer tax by starting a personal pension or joining a company plan. With compound interest at work, investments made when you're young can become much more valuable when you're older. Putting aside even a small amount can make all the difference in the world, 30 or 40 or even 50 years down the line, and you can always increase the amount you invest in manageable steps.

Start a personal pension

Personal pension plans are a way for people who don't have access to an occupational pension scheme to defer tax as they save for retirement. Your pension payments usually go into an investment fund, although you can also get Self Invested Personal Pensions (SIPPs) where you get much more control over how your pension fund is invested.

You receive tax relief on the payments you make: for basic rate taxpayers, the Government pays £25 into your pension for every £100 you put in, and for higher rate taxpayers there is an additional £25 of tax relief for every £100 you pay in. On retirement you can take out up to 25% of your pension as a tax-free lump sum, and the rest is basically used to provide you with a taxable income throughout your retirement.

Stakeholder pensions are personal pensions with a few unique features. Firstly, they must meet certain standards set out by the Government. They're penalty-free and they usually cost less than personal pensions if you’re putting in small amounts.

SIPPs, or self-invested personal pensions, are another personal pension option. With a SIPP, you pick the investments yourself, from stocks and shares to income trusts and business properties, and wrap them in the benefits of a pension. For the most part, SIPPs are subject to the same rules and benefits as other pensions, including tax breaks, limits on contributions, and the 25% restriction on the tax-free lump sum.

Join a company scheme

If you have a company pension scheme, it nearly always makes sense to join it, especially when you don't have to make contributions. With your employer putting money in on your behalf, not joining a company scheme is, effectively, refusing free money - and who would do that? Even if you have to contribute to your company pension, opting out is still turning down free money: less than half of the money you ultimately get through a company pension plan actually comes from your pay - most of it comes from your employer and through tax breaks.

If you don't have access to a company pension scheme, don't worry. You will need to save a little bit more, but it's manageable. It makes the most sense to save in a tax-efficient way – usually a personal pension or an ISA (more on these in Step Eight). Note that while you can put more into a pension than you can an ISA, a pension is not as flexible when the time comes to actually get at your money.

A final note on saving for your retirement

Your pension should form the foundation of your retirement savings plan. Build on it with a range of other savings and investment vehicles, from ISAs to funds and shares.